Sony Changes the Game

PlayStation zapped Nintendo and Sega to become a $5 billion video game juggernaut. The lesson: to win big, make your own rules.

By
Paul Roberts

In a small office inside Sony interactive studios America, a tightly packed collection of programmers, artists, and marketing specialists in San Diego, Holliday Horton is putting all-pro wide receiver Tim Brown through his paces. At Horton's command, the 6 foot, 190 pound Oakland Raider breaks into a sprint, stops cold, and leaps for a pass. Then he does it again. And again. "Now watch this," Horton says, clicking her mouse and magically removing all lateral motion from the athlete's powerful stride. On Horton's screen, the digital line drawing of Brown seems suspended in mid-air. The receiver's legs are churning uselessly. "That's how some people do it," she scoffs. "But without that side-to-side motion, it's like he's a bug pinned to the wall. It's totally unrealistic."

These are not idle criticisms. As a top artist in Sony Corp.'s North American video game group, formally known as Sony Computer Entertainment America (SCEA), Horton, 31, has a big stake in the degree to which little simulated men can be made to run and jump and smash into one another, realistically, on a television screen. Two years ago, she was a lead artist on NFL "GameDay" — one of the most important titles behind the rise of PlayStation, Sony's blockbuster entry in the $15 billion video game market. With sophisticated on-field simulations and astonishing 3-D action, Horton's game was an instant smash. More important, it made other sports games look like "Pong." Virtually overnight, GameDay was heralded as the first true "second generation" console title.

Expectations are already just as high for GameDay '98, the second sequel to the original hit. And until it ships, Horton and her colleagues will put in 12 to 14 hour days, every day, as will the PlayStation programmers creating other sports games (NHL "Face Off," NBA "ShootOut") plus a collection of action, adventure, and fantasy titles with names like Blasto and "Spawn: The Eternal."

Somehow, though, the San Diego studio remains calm — and visibly free of "management." Horton sets her own hours (she usually rolls in about 11 a.m. and stays until midnight) and is basically left alone to get things done. Her explanation: "They trust me." In fact, during crunch times, Horton's manager, Chris Whaley, has actually barred Sony brass from so much as visiting the studio. "As long as we keep bureaucracy at bay," says Whaley, 38, a jock and computer whiz with a taste for loud shirts, "we can get the job done."

Someone is obviously doing something right. PlayStation is the most successful new product from Sony since the Walkman and one of the most successful consumer products from any company in a long time. Until recently, the global video game market was dominated by two seemingly invincible giants: Nintendo and Sega. Then came PlayStation — and everything changed. Sony launched PlayStation in Japan in December 1994; SCEA launched it in North America in September 1995. By Christmas 1996, Sony had shipped nearly 3 million units in North America and 9 million worldwide. Through May 1997, it had shipped nearly 5 million units in North America and 16 million worldwide.

That's just hardware. PlayStation owners have also purchased 30 million pieces of game software in North America and 114 million worldwide. And many of its titles have made the transition from video game hits to pop-culture touchstones. Crash Bandicoot, the star of one of PlayStation's most beloved games, comfortably holds his own against Nintendo's Super Mario and Sega's Sonic the Hedgehog as a digital celebrity.

Talk about growth: a business unit with literally no sales three years ago will generate worldwide revenues of more than $5 billion this year (on gross retail sales of $9 billion). Talk about productivity: PlayStation has achieved these staggering results with roughly 1,500 employees worldwide and just 500 people in North America. That means the unit generates $3.3 million of revenue per person. Microsoft, a company legendary for its productivity, generates only $420,000 of revenue per person.

But what's most compelling about PlayStation isn't the breathtaking scale of its growth but the subversive logic behind it. How did Sony become a force in the video game industry? By changing the rules of the game. It redefined the market to include customers that Nintendo and Sega had ignored. It made technology choices that both enhanced the performance of its hardware and recast the economics of selling software. It designed a tough-minded approach to innovation that helps its in-house studios (and outside developers) churn out a string of popular games. And this year, in a unique effort to "close the loop" between producers and consumers, it released a product that lets players develop their own games.

"We are in uncharted waters," says Kazuo (Kaz) Hirai, SCEA's executive vice president and the highest ranking Play-Station executive in North America. Hirai runs the unit's day-to-day operations out of SCEA headquarters in Foster City, California, a Silicon Valley town about 20 miles south of San Francisco. "That means we're setting our own course. From the beginning we said we didn't simply want to take the gaming business away from Nintendo and Sega. We wanted to present our customers with a new form of entertainment. PlayStation is more than a toy. It's our dream to see a PlayStation console in every house, just like VCRs and CD players."

Fresh Eyes, New Vision

The first thing a visitor to Play-Station headquarters notices is how fresh everything looks. Cubicles and offices are spangled like dorm rooms with posters, plants, and sci-fi monsters. The Foster City staff looks like it should be running a college newspaper, maybe an independent record label, but not a multibillion-dollar division of one of Japan's most powerful companies. Top management sports remarkably few gray hairs.

The look is appropriate; almost everything about PlayStation represents a fresh take on the industry. Kaz Hirai is just 36 years old. Almost everyone in his management team is in their 30s — too young, they say, to have much regard for the status quo. "Young people don't have preconceived notions about how things should be done," says Phil Harrison, SCEA's vice president for third-party relations and R&D. "They just come up with solutions — without even realizing that they've arrived at success in a 'strange' way."

Harrison personifies the point. At 27, the tall, amiable Englishman works with outside game developers (Electronic Arts, Lucas Arts, Crystal Dynamics) to create a relentless stream of killer PlayStation titles. It's a role for which he seems born: ambitious, bright, and deeply interested in computers and video, he programmed his first game at 13 and at 16 quit school to become a consultant. Six years later he joined Sony and was assigned to a top-secret project known only as PSX. After two years of work, PSX became PlayStation. Harrison, still a kid, became an executive.

But the leaders of PlayStation aren't just young. Most of them are also outsiders — a status for which they make no apologies. Back in the late 1980s, when Sony was creating its enormously successful music division, it staffed the venture almost entirely with people from outside the music industry. "We didn't want people from the record business," explains Hirai. "They would just bring their old ways with them. We wanted people who would have to figure things out all over again, who would question everything, people who 'didn't know any better.'" Sony took the same approach to PlayStation. Half the unit's top personnel, including Hirai, came from Sony Music rather than the video game business. "The last thing I want to hear is, 'We tried that last year and it didn't work,'" Hirai says. "Our business changes constantly. What didn't work a year ago might work today."

Those fresh eyes saw a number of strategic vulnerabilities at Sega and Nintendo — and created a business model to take advantage of them. The most serious vulnerability was vanishing variety. Although Sega and Nintendo made some undeniably exquisite games, the two giants were increasingly unwilling, or unable, to develop successful titles outside a few proven genres. "In 1994, there were something like 16 baseball video games," says Kelly Flock, 43, president of Sony Interactive Studios America. "It was a perfect example of the dying creativity of a stagnant industry."

This timidity was understandable. The early 1990s were littered with failed attempts to develop "second generation" consoles, and gaming companies had grown wary of big risks. The industry's economics also worked against innovation. Nintendo, for example, has always sold games on proprietary cartridges that are expensive for developers to buy (a blank cartridge sells for up to $35) and take months to manufacture. It expects its partners to bear these costs. Nintendo insists that third-party developers place huge orders for cartridges and pay their manufacturing fees upfront. Forget just-in-time inventory; long manufacturing lead times mean retailers have to bet months in advance on which games will be hits.

The result? Developers worked only on games with huge market potential. Retailers featured a limited selection of titles. Video games, like Hollywood and book publishing, became a business of blockbusters, sequels, and knockoffs. "As a business model, a creative platform, and a consumer value, the industry had run out of steam," says Phil Harrison.

Hence PlayStation's first strategic innovation: maximize the number and variety of titles available to customers. "This industry is full of dreamers," says Kelly Flock. "But the technology and economics had been limiting creativity. We believed that we could inspire the creative side of the industry, that we could help the artists and engineers do the things they had been dreaming about."

PlayStation's second big innovation involved customers themselves. In PlayStation's view, Nintendo and Sega had focused too narrowly on traditional gamers — boys between the ages of 10 and 16. It was an undeniably huge audience; the worldwide installed base of video game consoles exceeds 30 million. But PlayStation concluded that its long-term growth prospects were with the tens of millions of people who had stopped playing games or were never interested. (See "Different Market, New Message," on p. 124) This audience was older and more sophisticated than young boys, with harder-to-predict tastes. No one knew what kinds of games would resonate. The only way to find out was to experiment.

Which was a problem. Every constituency in the business had become addicted to blockbusters. Reaching a different audience meant persuading lots of players to try something different, to get a little wild. That meant reinventing the economics of the industry — and that meant embracing a new technology platform.

Here too the establishment was vulnerable. Nintendo stuck with cartridge-based hardware because of its blazingly fast performance — and because it was the platform on which it rose to power. But PlayStation concluded that CD-ROM technology was superior on almost every other dimension. CDs are cheaper than cartridges — $5 to $10 versus $35. They're easier to turn into games. PlayStation manufactures CD-ROMs in three U.S. factories and fills orders within two weeks. Nintendo manufactures cartridges in Japan and takes as long as three months to fill orders. And CDs can store vastly more data than cartridges (650 megabytes versus 16 megabytes), which allows for more complex graphics and games.

"It's amazing how much more value you get with a CD," says Flock. "Not to mention manufacturing turnaround. The cartridge model does not allow for any meaningful inventory management among retailers. It also means publishers will not take any creative risks. The only innovation in interactive gaming is with CDs."

It's hard to overstate the importance of CD economics to the PlayStation model. Its flexibility lets the company test offbeat games in small batches and, if a hit appears, bring large volumes to market quickly. It also helps developers try to defy cultural barriers. Games that do well in Japan often bomb in Europe and North America. CDs let PlayStation troll for crossover titles by doing test runs of, say, 5,000 copies and monitoring the market response.

"Parappa the Rapper," perhaps the most unusual video game ever published, epitomizes PlayStation's willingness to experiment with genres and demographics. Parappa is a little dog who lives in a pop-art world with his friends, a cat and a bear, and his girlfriend, a sunflower. It's the flower's birthday, but Parappa has dropped the cake and, lacking money, heads to a flea market. There, he meets a rapping frog. Each time the frog raps out a tune, the players must match its rhythm by hitting the correct sequence of buttons on their PlayStation consoles.

Developed by Sony Music, "Parappa the Rapper" was launched in Japan last fall. Little kids didn't get it and teens were turned off by the childlike graphics. But the game was a surprise hit among twenty-somethings. It's been among the country's top 10 titles for a year and has sold more than 700,000 copies. With high hopes for a geographic crossover, Sony plans to release the game in North America this November. The company still needs plenty of hits in traditional genres — sports, action, racing — but offbeat games like Parappa are what distinguish PlayStation from the competition.

To be sure, for all of PlayStation's triumphs, the game is far from over. Last September, Nintendo launched its own second-generation video console (dubbed N64) with speed and graphics that clearly outperform the PlayStation. During its first nine months on the market, North American consumers bought an impressive 2.6 million units. But Nintendo continues to struggle with its blockbuster complex. As of this summer, PlayStation customers have 250 game titles from which to choose. When Nintendo launched the N64, there were just 2 titles on the market. There are still fewer than 20. For PlayStation, variety remains the spice of business life.

Free Spirits, Hard Work

So what is this? a military simulation? Rambo in a tank? A dessert topping?" In a conference room in Foster City, Jeff Fox sits at the head of a long oval table, looking mildly cross. For the past half hour, the 33-year-old senior PR director has been meeting with a dozen sales and advertising types, watching as Susan Nourai, an assistant marketing manager in Foster City, rolls out a tank-battle game called "Steel Reign". Nourai, 25, is understandably nervous: a warm reception today means a generous marketing budget, which means more sales and fatter royalty checks for her team.

The first part of the demo goes reasonably well. Nourai lays out the concept (tanks shooting at other tanks) and describes the weaponry (cannons, guided missiles, machine guns). She goes over the game's story line and setting, brushes off a friendly heckle ("It's the future, and all the bowling alleys are closed!"), and, after nervously driving her tank into a building ("ooops!"), proceeds to set the 3-D landscape on fire. Tracer streaks fill the screen. The room echoes with explosions. Nourai dispatches a progression of enemy tanks, then blows a helicopter out of the sky. The table erupts in cheers. "Check out how good that smoke looks," someone says.

But as the talk turns to marketing, Fox, a small, dark-haired man with a probing wit, voices concern. As the guy who must pitch "Steel Reign" to a jaded trade press, he worries that the game's audience is not sufficiently defined. What's the message? How's the game being billed? As a serious battle "sim" (simulation) for armchair strategists? As an action game? As both? Neither? Gradually, under steady questioning by Fox and others, the "Steel Reign" team refines its marketing strategy. The game is scheduled for a September release.

High-stakes decisions like this are a regular part of life at PlayStation. Sure, the programmers in San Diego and Foster City make games. But they're really in the business of manufacturing creativity. Their work is a daily struggle to balance chaos and control, brilliance and budgets, experimentation and efficiency. In this sense, they face the same challenges as people in any business — Hollywood, Madison Avenue, Wall Street — that fuses open-minded innovation with tough-minded execution.

As video games become bigger, faster, and more lifelike, the stakes keep rising. Three years ago, Jonathan Beard, a 28-year-old producer and graphic artist, could sit down with a few programmer friends and create a game in six weeks. Beard's current project, a complex fighting game called Blasto, took 18 months of work and a small army of professionals: four programmers, four modelers, three animators.

That's typical. Between 1988 and 1993, the average cost of making a video game jumped from $80,000 to $500,000. Since then, it has leaped to $1.5 million — with a few projects burning as much as $8 million to $10 million. Yet by all indications, Blasto will not only make its deadline but also make a major splash in the Christmas market. Some insiders are predicting it will be one of PlayStation's biggest games ever.

That's typical too. PlayStation works hard to master the personal and organizational tensions inherent in designing cutting-edge software for a fast-moving industry. "Things change so quickly that we do want people to reinvent the wheel," argues Phil Harrison. "Our biggest competitor is complacency, and the only way to combat complacency is to challenge yourself with extraordinary goals."

How does PlayStation rise to the challenge? First, it makes work playful — even as it keeps it serious. Most designers got into the video game business because they loved games, not business. That simple reality has big management implications. Game designers are supremely motivated to complete their individual projects. But they lack traditional career ambitions or a corporate navigational sense. "These people tend not to be real aggressive self-promoters," explains Kelly Flock. "They want to be noticed without being a squeaky wheel, which means that part of being their manager is being their advocate." Translation: designers are gamers first and businesspeople second.

That said, everyone understands that PlayStation is serious business. Most titles sell for somewhere around $50; a hit can ship as many as 2 million units worldwide. That means a single project team can generate as much as $100 million in retail revenue. Team members receive sizable bonuses (a fixed percentage of their salaries) when they meet their alpha, beta, and final-ship milestones. They also receive quarterly royalties for the games they design. PlayStation calculates each game's revenues, subtracts development costs and an allocation for marketing and overhead, and then divides a royalty pool among the team. These royalties can add up to real money — the best evidence of which is the number of expensive sports cars parked outside Sony's studios.

PlayStation also encourages autonomy — but demands accountability. Game designers like to be left alone. A sense of independence — defiance, really — oozes from every corner of the studios. In Foster City, gamers openly deride the executive offices as "Mary Kay Headquarters." Half the cubicles are off-limits to outsiders. One sign announces: "We don't mean to sound rude, but for development security reasons, visitors are not allowed past this point." For added emphasis, storm troopers from "Star Wars" stand guard. The message is unmistakable: Nobody tells us what to do.

The flip side of all this autonomy is accountability. And the essence of accountability is shared goals. Once a project has been "green-lighted" — that is, once a producer, a programmer, and an artist have developed an outline, and a development team has been assembled — members of the team strike a formal agreement about how work will proceed. The agreement includes lots of traditional metrics: project objectives, deadlines, milestones. It also includes metrics that reflect life on software teams: worst-case scenarios, required work hours, "all the things people need to be prepared for," Flock says.

Job assignments are especially contentious. In the old days, when game teams involved just two or three people, the ideal designer was a brilliant generalist with multiple skills. Today's games require much larger development teams — and much narrower specialties. This new reality can irk industry veterans. "They're playing a smaller role in a bigger process, and a lot of them don't like it," Flock says. That's why it's critical for everyone to know exactly what's expected of them, what they will and won't be doing.

Third, PlayStation encourages people to work in teams — and to compete. The studios revel in an organizational tension that would make most companies very uncomfortable: just because everyone is on the same side doesn't mean they always have to get along. At PlayStation, creativity and competition are two sides of the same coin.

Paul Forest, 25, an artist based in San Diego, shares a cubicle with four team members. Forest is working on "Spawn": The Eternal, a game in which an unlucky traveler is doomed to wander hell's many levels — and battle whomever he meets. "Spawn" is not a sports title. In fact, although this cubicle is less than 200 feet away from where NFL "GameDay" '98 is being produced, it might as well be 200 miles away. Forest barely tolerates his sports-minded neighbors. Chris Whaley, who runs the sports studio, laughs at the conflicts between teams that work on sports games and those that don't: "We call them the 'Ghouls and Goblins' and they call us the 'Dumb Jocks.'"

Recently, in fact, after sharing one giant studio, the sports and nonsports teams were given quarters in separate buildings and now operate almost totally independent of one another. "Teams are competing for internal resources," says Flock, "for marketing dollars, support for their products. And they know how much that matters."

Finally, PlayStation expects success — but prepares to manage failure. Even the best-designed systems can't guarantee creative perfection. PlayStation pulls the plug on about 15% of the projects it starts. The studios rarely assign those teams another project.

"When you terminate a project," Flock says, "you have to break up the team. Failure usually means that the team dynamics weren't working. Chances are that the dysfunction will continue into the next project."

Interestingly, "hot teams" face a similar fate. Teams that are clicking get subdivided into two or more new teams. "After a killer project," Flock says, "the number two person is ready to become number one on a new project. The second artist is ready to become a lead artist, and so on." The studio often creates new teams before it knows what projects they'll be working on. "The industry is moving so fast now that you almost have to start on a project before you really know exactly what it will be," says Flock. "You want your teams in constant motion."

Tough Customers, Great Developers

What do you do after you've conquered an industry with relentless innovation in hardware, software, and business strategy? Generate more innovation in all three areas. After all, Nintendo and Sega are pursuing aggressive comeback strategies — and making genuine headway. PlayStation's only option is to keep changing the game.

That's why the mass market isn't the only arena where PlayStation is rethinking how it develops products and relates to customers. It has devised new techniques for reaching hard-core gamers known as "evangelists" — people recognized by their peers as gurus. Most of us have a friend or neighbor whose advice we seek before buying a car or computer. Gamers are the same way. By targeting these evangelists, says Phil Harrison, the company's ambassador to outside developers, PlayStation is "reaching the top of our consumer pyramid: the experts, the know-it-alls, a group that understands the industry but isn't developing games."

"PlayStation Underground", the company's customer magazine, is one vehicle to reach this constituency. It's available on CD-ROM and online, and it's an evangelist's dream. It features everything from samples of coming games to coded tips for how to win existing games. That's a big deal. Game tips (secret codes that give players access to better weapons or more "lives") are an important part of hard-core gaming culture. PlayStation doesn't just tap into that language; it uses that language to influence behavior. "Gamers are notorious for never reading instruction manuals," says Colin MacLean, 36, manager of online and direct marketing. "So we hide codes in the instructions, and they read every word!"

PlayStation's most recent — and most radical — initiative is Net Yaroze, a special edition of the video console that allows players to create their own games. SCEA unveiled Net Yaroze in March. The consoles are available only direct from Sony (list price: $750), which means the company knows exactly who is buying them. And PlayStation is not just selling Yaroze hardware and programming software. It's also creating a Yaroze community. Users will be able to design their own games, discuss them with other Yaroze owners, collaborate on games through a private Yaroze Web site, even get expert tips from PlayStation programmers in San Diego and Foster City.

Among hard-core gamers, Yaroze has been hailed as a breakthrough concept. Harrison thinks of it as a challenge: "OK, Mister Gameplayer. You've always sat at home and said, 'This game sucks, I could do better.' Well, here you are, go do it."

No one knows how many PlayStation games Net Yaroze will create. But the mere fact that it exists creates a rare sense of openness in an industry notorious for proprietary technology and tight controls. And who knows? It just might produce a hit or two.

Harrison says he looks forward to the day when a magazine interviews the developer of a hot PlayStation game — and the developer says the game took shape when he was a Yaroze owner. Maybe he pitched the idea to an outside company, maybe to PlayStation itself. But somehow he got the chance to build a full-fledged consumer title based on what he did at home with Yaroze.

Far-fetched? Perhaps. "But that," says Harrison, "is the dream."

Paul Roberts (proberts79@aol.com) is a writer based in Seattle and a frequent contributor to Fast Company.